Appendix 13

Section 25 report, Local Government Act 2003

1. Section 25 of the Act requires the Chief Financial Officer (the County Treasurer) to report to the County Council when setting its council tax on:

· the robustness of the estimates included in the budget

· the adequacy of the financial reserves in the budget

2. The County Council is required to have regard to this report in approving the budget and council tax. It is appropriate for this report to go first to Cabinet and then made available to the County Council in making its final decision.

3. The CIPFA guidance on reserves and balances provides the general framework for considering the adequacy of reserves. This puts emphasis on the medium-term budget strategy. This is set out in Appendix 9 where the forward budget plan is put in the context of the financial management policy agreed by the County Council. Only a two year view is possible with the current grant settlement, no spending plans or figures are available for 2008/09.

4. A risk assessment has been made of the cost and demand pressures on budgets, insurance liabilities, achievement of budget savings, adverse winter conditions and achievement of capital receipts which supports the proposed level of balances of £10.8m. This assessment is set out as an Annex to the Appendix.

5. Similarly the level of reserves is scrutinised each year and the protocol on the purpose, use, control and review of each reserve has been agreed. Details of the protocol and the expected movements in each reserve are set out in Appendix 10. Schools have the single biggest reserve at £33m within their delegated budget and ring-fenced specific grant. The most important reserves for other services in terms of the three year view are the grant equalisation reserve (used to help match grant loss), the job evaluation transitional costs reserve and the capital reserve used to smooth capital financing over the three year capital programme.

6. Section 25 concentrates on the uncertainty within the budget year rather than the greater uncertainties in future years. However as the budget report makes clear, it is the greater uncertainties in 2008/09 that inform the need for reserves and balances during 2006/07 and 2007/08, together with the impact of pay and benefits in 2006/07 and greater risks of overspend from tight savings targets in both 2006/07 and 2007/08.

7. This budget report is the conclusion of a detailed process of prior consultation and consideration throughout the current year by Cabinet.

8. The County Council's policy on balances is to hold a minimum prudent level equivalent to less than 2% of the budget. This is relatively low but is sustainable given past experience provided that other elements of the financial management policy are maintained, particularly sound budget monitoring and budgetary control, and no supplementary estimates, so that spending variations are contained as far as possible within the year. However in 2006/07 there are greater risks because of higher savings targets, especially on adult social care.

9. The level of uncertainty for the budget year is narrowed down as the budget strategy is developed during the year and defined in the risk management, balances and reserves paragraphs in the budget report.

10. In setting the budget the County Council should have regard to the strategic, operational and financial risks facing the County Council. The County Council has an overall risk management framework which covers these issues. The forward budget plan and reserves take into account the main risks and uncertainties, including:

· Inflation

- There is more certainty in three year pay awards, 2.95% is fixed for 2006/07

- price inflation has been set at 2.5%. This may not be sufficient in all cases and budgets have been adjusted (eg in purchase of social care, in buildings repairs and maintenance and street lighting energy costs) where higher prices are likely in 2006/07

- interest rates are not likely to rise or fall substantially and provision has been made for the current cost of borrowing

· Pay drift

- increments are not budgeted for and services will need to secure efficiency savings of £2.0m to offset these. Past trends suggest that this will be managed.

- there is a substantial potential liability from the implementation of the pay and benefits review. The budget provides for estimated continuing costs of £10m - £7.5m from a specific pay contingency and £2.5m from a benefits realisation plan to be agreed. £10m has been set aside for back pay; a settlement in excess of this figure will require compensating job or service cuts to avoid the extra costs falling on council tax which is already projected at close to the capping limit in 2006/07 and 2007/08

· Pensions

- expected increases in employers' contributions following the actuarial valuation at 31 March 2004 have been built into the 2006/07 budget and forward plan for 2007/08

· Additional spending, savings and redeployments built in to the budget

- these are subject to planned review by Executive Members, and additional amounts currently held in earmarked reserves will only be released by the Executive Member, Policy and Resources against business plans which take into account value for money and both efficiency and performance improvements

· Efficiency savings and other savings

- there is a good track record covering the process of setting and achieving savings, but the target is difficult in 2006/07 and larger balances are recommended to cover the risk of under performance

· Income

- there is an annual review to maximise income and increase income at least in line with costs

· Achievement of budget plan

- well established and sound history of very close achievement of outturn to budgets

· Strength of financial information and reporting arrangements

- budget monitoring and control is well established, particularly in reporting and taking action over the second half of the financial year

- the Audit Commission has drawn the Council's attention to consider more regular capital programme monitoring reports and the reporting of final costs on capital schemes and further improvement is required

- other action plans will be put in place to improve on the ratings within the Audit Commission's appraisal of use of resources, including regular asset valuation. Budget provision is made to strengthen further value for money arrangements and improved internal audit for governance and anti fraud and corruption policy

· Capital programme

- capital strategy, asset management plans and the local transport plan have all previously been accredited with the highest scores in the comprehensive performance assessment

- the impact of unsupported borrowing in advance of capital receipts is putting a strain on the capital programme and there is a potential shortfall of capital financing resources over the programme period. A review of the professional fees being accrued and another review to obtain more capital receipts, and realise those already planned as soon as possible will be required in summer 2006

- policy on Government borrowing approvals will also be reviewed from 2007/08 onwards, because as a Council at the grant floor, increases in capital financing costs on `supported borrowing' are not being matched by revenue support grant

· Level of borrowing and outstanding debt

- fully covered in treasury management strategy and prudential indicators

- the policy on unsupported borrowing aims to contain the financing costs within the forward budget plan cash limits without an additional impact on the council tax payer

- levels of debt are beginning to increase and the trends will be reviewed

· Contingent liabilities

- the County Council self-insures, so it handles all its own liability claims. The liabilities are uncertain but to cover these a provision is maintained for known liability claims

· Statement on internal control

- the Treasurer has the responsibility for ensuring that an effective system of internal financial control is maintained and operated in connection with the resources concerned

- the review of the effectiveness of the system of internal financial control is informed by the work of the managers within the County Council, by internal audit and the Audit Commission in its annual management letter and other reports

- The Governance Committee receives and reviews the statement on internal control

· Audit Commission

- gave an unqualified opinion on the 2004/05 accounts

- provided a score of 3 out of 4 on the new harder test for use of resources and an action plan is in place to sustain and improve this assessment

· Other risks

- there are potential legal claims outstanding and other possible risks which past trends suggest can be met from balances if required. There is no known risk or liability which requires a contingency or reserve not already provided for in the budget report

- changes in function and funding arrangements. These vary from year to year and are evident in the adjustments that have had to be made to the 2005/06 budget for comparison purposes. The main change which will affect future budgets is the continued restructuring of children's services and adult social care. There is greater risk of failure in budgetary control whilst the reorganisation proceeds, and transitional costs will need to be absorbed

- grant loss of £38m is projected after 2007/08. Reserves need to be adequate to protect against potential volatility in the future

11. Provided that the County Council considers the above factors and accepts the budget recommendations, including the level of earmarked reserves, a positive opinion can be given under Section 25 on the robustness of the estimates and level of reserves.

Jon Pittam

County Treasurer

2 February 2006